Cyprus-linked PEs seek refund of tax on returns

​According to source, about a dozen private equity funds are set to approach the revenue department in the next few months to seek a refund in their 50 investments.Sachin Dave | ET Bureau | July 09, 2016, 07:53 IST

MUMBAI: Private equity funds that have invested in India through Cyprus have approached the revenue department to retrospectively refund about two thirds of the taxes they have paid in the country.

The returns of these debt funds were taxed at 30 per cent since India blacklisted Cyprus in November 2013, after that country refused to share details of some Indian tax evaders.

However, after India renegotiated the tax treaty with Cyprus last week, the tax on the returns was brought down to what it was under the original tax treaty, which is 10 per cent. According to an industry estimate, about a dozen private equity funds are set to approach the revenue department in the next few months to seek a refund in their 50 investments.

ET could confirm that about 10 of these have already written to the tax department for refunding the additional tax deducted in last two years.

Since the tax is now brought back to 10 per cent, they want the government to return the extra 20 per cent that was deducted from their returns as tax.

“Several Indian companies had withheld 30 per cent tax on the payment of interest income to the Cyprus debt funds."

"Considering the fact that the final taxability as per the India Cyprus tax treaty was always 10 per cent and now that Indian government seem to have agreed to rescinded the 2013 notification retrospectively, these funds could approach the tax department for claiming the refund of the balance 20 per cent,” said Punit Shah, partner at tax consultancy Dhruva Advisors.

Among PE funds, those who have invested money in debt deals in India have traditionally brought the investment though Cyprus. Most of these debt deals have happened in the real estate and infrastructure sectors.

In these deals, the interest income was taxed at 30 per cent in the hands of the company before it was passed on to the PE fund. The PE fund would then transfer the money back to Cyprus.

“The Indian companies which had deducted higher withholding taxes as per section 94A of the Income-tax Act, 1961 can apply for refund as per Circular 7 of 2007 issued by the Central Board of Direct Taxes. However, the refund has to be filed with two years of end of the financial year in which tax is deducted,” said Amit Maheshwari, partner at Ashok Maheshwary & Associates.

Some of the biggest private equity funds and a few foreign portfolio investors were impacted due to the government blacklisting the Cyprus route for investment in 2013. This was challenged in court, but the Madras High Court in April this year upheld government’s decision.

Most of the PE investments via Cyprus have gone into real estate and infrastructure. Their total investment in financial year 2013-14 was Rs 3,401 crore, followed by Rs 3,634 crore in 2014-15 and Rs 2,589 crore between April and December in 2015.

Total investments in India via Cyprus total Rs 41,952.42 crore, according to government data.